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Why the Airline Industry Could Take Off in 2025

Why the Airline Industry Could Take Off in 2025

Thoughts on the Market vor 1 Jahr

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After an up-and-down 2024 for the U.S. airlines industry, our
Freight Transportation & Airlines Analyst Ravi Shanker
explains why he is bullish about the sector’s trajectory over the
next year.

----- Transcript -----

Welcome to Thoughts on the Market. I’m Ravi Shanker, Morgan
Stanley’s Freight Transportation and Airlines analyst. Today I’ll
discuss why we remain bullish on the US Airlines industry for
2025.

It’s Friday, December 13, at 10am in New York.

The Airline industry entered 2024 with good momentum, lost it
during the middle of the year with some concerns around the
economy and capacity, but then turned it around in the fall to
finish the year with the strongest run that the Airlines have had
since the pandemic. The coast looks clear for 2025, and we remain
bullish on the US Airlines for next year.

While many airline stocks enter 2025 close to post-pandemic if
not all-time highs, valuations are still attractive enough across
the space to see upside across the industry. The big question
right now is: will the focus on premium services continue to pay
off, or will there be a resurgence in domestic travel that alters
the market dynamics? We think the answer is both.

Premium beneficiaries will continue to shine in 2025. We believe
the premiumization trend in the industry is structural and will
continue next year. Legacy carriers have successfully capitalized
on this trend, enhancing their revenue streams significantly
through upgraded service offerings such as premium seating and
lounge access. This move isn't just about luxury—it's a
calculated play to boost ancillary revenues, which are becoming a
more critical component of financial stability in the airline
industry. The premium leaders are building annuity-like business
models – think razorblades, printers or smartphones – where the
sale of a popular gateway product is followed by the bulk of the
profitability coming from ancillary revenues generated in the
following years, as loyalty and adjacent revenues contribute a
steady stream of earnings and free cash flow to the airlines.

On the flip side, the conversation around better margins on
domestic travel is gaining momentum as well. 2024 saw a big shift
where several domestic carriers made significant changes and even
in some cases fundamentally overhauled their business models to
fly less, fly differently, bundle fares, and move upmarket. This
change brought significant disruption in 2024 but could be set to
pay dividends in 2025 and reignite investor interest in these
domestic names. This shift toward domestic travel could
potentially redistribute market share and redefine competitive
dynamics within the entire Airlines industry.

To sum up, the setup for 2025 looks very good. But volatility
could remain high due to external factors. The biggest risk into
2025 -- especially the second half of [20]25 -- continues to be
the macro backdrop. More specifically, our economists' view of a
sharply slowing GDP growth and services spending environment in
the second half of [20]25 and into [20]26. While we take comfort
from the resilience of travel spending so far, we know that
things could change quickly. We will continue to keep you updated
throughout the next year.

Thanks for listening. If you enjoy the show, please leave us a
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